ARE Newsletter September 2015 - Innovative Financing in Africa

Editorial

Africa – A Land of Opportunities

After the IEA addressed the need to increase worldwide engagements to assist Africa in its growth path, we have decided to dedicate this ARE newsletter to a region which is still facing the highest needs for energy access worldwide but also where numerous players from the public and private sector are looking for the right partners to strengthen their commitments.

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Dear friends of the Alliance,

After the IEA addressed the need to increase worldwide engagements to assist Africa in its growth path, we have decided to dedicate this ARE newsletter to a region which is still facing the highest needs for energy access worldwide but also where numerous players from the public and private sector are looking for the right partners to strengthen their commitments.

In respect of the awaited formal adoption of the new ‘Sustainable Development Goals (SDGs)’ by the UN members states later this month, it should be highlighted that there are already numerous ready-to-use technical and business solutions at hand. The 7th SDG to ‘ensure access to affordable, reliable, sustainable and modern energy for all,’ for example, could be achieved by making use of decentralised renewable solutions which are both cost effective and easy to install in the short term, provide the energy poor with a better quality of life and thereby with a better perspective in their regions.

Therefore, in the full understanding of the role sustainable energy solutions need to play in the near future, ARE with its growing membership has been working intensively to develop business models that can deliver on the objectives of the Sustainable Energy for All (SE4All) initiative. The 2nd SE4All Forum in New York in May this year underlined once more that more and adequate financing, together with risk identification and mitigation tools, is needed to make rural electrification and access to energy services a reality.

In this context, ARE is very pleased to announce the publication of its new study on risk management for mini-grids. We would like to thank ARE member Neu-Ulm University of Applied Sciences (HNU), in particular, David Manetsgruber and Prof. Bernard Wagemann for their strong efforts and their will to make their research work public. We believe that the study will help practitioners active in different rural electrification technologies to better identify the potential risks and how to mitigate them.

In general, regarding access to finance, several possibilities to raise capital and attract investment could be considered. Governments looking to financially support clean energy access should reconsider their current energy subsidy schemes, reallocate support for fossil fuels to renewable energy and reduce their overall amount. The potential impact would be massive, given that current energy subsidies amount to US$ 5.3 trillion in 2015 or 6.5 % of global GDP, according to a recent IMF study. In the same vein there is a need to put an effective price on carbon, thus naturally tilting the balance in favour of clean technologies and towards a sustainable future.

Overall, the public and private sector must strive to deepen their collaboration and create incentives to bring about increased investment in clean rural electrification. The recent ARE-OFID Call for Proposals is such an example that brought the resources of different parties together. ARE will leverage the grant support of US$ 1 million from the OPEC Fund for International Development (OFID) to enable the implementation of four clean energy mini-grids projects in Bangladesh, India, Mali and Mozambique over the course of the next 24 months. In addition, practitioners are invited to make use of the 'Mapping of Clean Energy Mini-grid Support Providers and Programmes’ webtool and publication to get access to wide range of supporting facilities.

To have a higher impact in rural areas, there is a need for better cooperation amongst financiers such as between donors, banks, microfinance, crowdfunding initiatives but also with leading investors from pension funds, venture capital. To learn more about such initiatives, ARE will organise and support its partners in several conference and side event sessions at SAIREC in Cape Town from 4 to 7 October 2015.

In spite of the summer period, we are delighted to see that the interest to join the Alliance as coordination and matchmaking hub for the off-grid sector continues to grow. Since the last newsletter in June, we have had the great pleasure to warmly welcome four new members.

Wishing you a fruitful reading,

Marcus

In Focus: Voices from the ground

RECP Finance Facilitator: Linking Projects with Financiers

Mobilising private investment into Africa’s renewable energy markets is critical for improving energy access, energy security and economic development in Africa. The Africa-EU Renewable Energy Cooperation Program (RECP) has hence been designed to support the development of vibrant renewable energy markets on the African continent.

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Mobilising private investment into Africa’s renewable energy markets is critical for improving energy access, energy security and economic development in Africa. The Africa-EU Renewable Energy Cooperation Program (RECP) has hence been designed to support the development of vibrant renewable energy markets on the African continent.

Mobilising private investment into Africa’s renewable energy markets is critical for improving energy access, energy security and economic development in Africa. The Africa-EU Renewable Energy Cooperation Program (RECP) has hence been designed to support the development of vibrant renewable energy markets on the African continent.

On the one hand, access to finance is one of the biggest challenges for renewable energy entrepreneurs pursuing projects in Africa. On the other hand, international and regional development banks have, in recent years, developed targeted instruments and specific funds to finance renewable energy projects in Africa. In order to help project proponents identify and access these support instruments, the RECP has developed the “RECP Finance Facilitator”. The Finance Facilitator connects project developers seeking financing with financiers seeking bankable projects through an easily accessible portfolio of advisory services:

Online Database of available financing instruments

Structuring Support advising on essential aspects of business case and financial model

Project Development Support providing guidance on the necessary steps to ensure quality and completeness

Transaction Support assisting project developers with regards to the various transaction documents for the regulatory, financial, technical and commercial aspects

Since the technical and financial requirements of each project are different, the Finance Facilitator’s services will be adapted to the project’s characteristics and tailored to the specific requirements of the project as well as appropriate financing mechanisms.

A tender for a qualified service provider is currently in preparation, expressions of Interest can be made shortly. It is expected that the Facility will be operational in spring 2016.

The Finance Facilitator is an integral part of the larger RECP programme, a European multi-donor initiative under the Africa-EU Energy Partnership (AEEP). Recently, the RECP published a new video to promote the services offered to entrepreneurs who want to realise a renewable energy project in Africa which can be viewed here. For more information, please contact recp(at)euei-pdf.org.

Decentralised Investment for scaling up Rural Electrification in Africa

The proposal to include the goal of energy access in the post-2015 Sustainable Development Agenda underlines the crucial role modern energy solutions are seen to play in driving socio-economic improvement, especially in the case of decentralised rural off-grid energy access in Africa. The international consensus is clear, the capital exists and the projects do too, nevertheless examples of successful matching are few and far between. We consider that this is essentially explained by a mismatch between the goals and requirements of development institutions and the reality faced by actual projects & project developers like ourselves.

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The proposal to include the goal of energy access in the post-2015 Sustainable Development Agenda underlines the crucial role modern energy solutions are seen to play in driving socio-economic improvement, especially in the case of decentralised rural off-grid energy access in Africa. The international consensus is clear, the capital exists and the projects do too, nevertheless examples of successful matching are few and far between. We consider that this is essentially explained by a mismatch between the goals and requirements of development institutions and the reality faced by actual projects & project developers like ourselves.

As an early stage independent start-up, RVE.SOL has faced its fair share of challenges in financing rural energy and water projects across East Africa. We are often told that 'bundling' is key and that ideally we should propose a country specific project portfolio worth upwards of €2-5m as this reduces transaction costs, goes some way toward matching traditional energy infrastructure financing and is considered a prerequisite for effective replication and scale-up. This may well be the best solution within the current financing paradigm, but it begs a fundamental question: Technology has evolved to meet the needs of rural electrification, is it not time that financing evolved as well?

International development institutions and the financial sector need to consider engaging with energy access practitioner organisations such as ARE alongside regional experts across Africa in order to develop 'decentralised' financial products that enable the provision of a low-cost credit line to country-level or regional second-tier specialist institutions that understand the local context and are charged with disbursement of capital in smaller amounts at lower cost over longer periods to more energy access projects. Sceptics may well consider this blue-sky thinking, however the prevalence of grant-based 'pilot' projects and difficulties experienced in replication is a strong indicator that there needs to be a fundamental evolution in financing mechanisms and risk mitigation methodologies.

Naturally the energy access industry itself must do all it can to encourage this evolution. Increased cross-sectorial communication, standardisation of payment collection technologies, development of common regional risk mitigation procedures and transparent dissemination of lessons learned through practitioner experience are just some of the actions needed in order to enable the creation of these second-tier specialist institutions. Africa is a diverse continent with vastly different enabling environments, thus we see the creation of regional or country-level specialist energy access financing institutions as a crucial step if we are to take decentralised rural electrification to scale.

Risk Management for Mini-grids – A New Approach to Guide Mini-grid Deployment

By David Manetsgruber, Research Assistant, Neu-Ulm University of Applied Sciences

How effectively and cost-efficient do we manage risks when operating mini-grids? Financial, social and political risks can be a fateful threat for the sustainable economic viability of mini-grids, but very often these risks are not managed with a systematic risk procedure. These are some of the main results from the study carried out by ARE, GIZ and the Neu-Ulm University of Applied Sciences (HNU). The study is based on the evaluation of the experiences faced by ARE members who brought their long-standing experiences and their knowledge they acquired as implementers, project developers or operators of mini-grid. The study not only clarifies existing risks and risk drivers but also found that these risks could be reduced through professional risk management.

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How effectively and cost-efficient do we manage risks when operating mini-grids? Financial, social and political risks can be a fateful threat for the sustainable economic viability of mini-grids, but very often these risks are not managed with a systematic risk procedure. These are some of the main results from the study carried out by ARE, GIZ and the Neu-Ulm University of Applied Sciences (HNU). The study is based on the evaluation of the experiences faced by ARE members who brought their long-standing experiences and their knowledge they acquired as implementers, project developers or operators of mini-grid. The study not only clarifies existing risks and risk drivers but also found that these risks could be reduced through professional risk management.

The next project started at the HNU is to develop a standardised digital tool, which will guide developers and operators of mini-grid through the analysis, the assessment and consequently the reduction of risks in an effective and efficient way. The pilot development and evaluation of such “Standardised Risk Management Procedure” (SRMP) will be done by the HNU team headed by Professors Bernard Wagemann and Elmar Steurer and in cooperation with operators of mini-grid in greater Kolkata, West Bengal. While the accompanying LOIs have already been signed, the project implementation in cooperation with the local universities is in preparation.

The deployment of this tool should also help to bridge the existing language gap between technicians and bankers / investors. For potential investors, the tool serves as a clear improvement in the transparency of the risk landscape as well as a greater plausibility for proactive risk management of developers and operators. Access to private capital can be improved this way.

Risk Clustering as a Finance Concept for Rural Electrification in Sub-Saharan Africa to attract international private investors

By Elmar Steurer, David Manetsgruber and Esther Prudence Jouego, Neu-Ulm University of Applied Sciences

Projects in the energy sector in Africa especially in rural areas suffer from a number of barriers of regulatory, institutional and financial nature. Especially the combination of political instability and an unclear regulatory environment hampers the private sector to realise the investment possibilities in the field of decentralised rural electrification.

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By Elmar Steurer, David Manetsgruber and Esther Prudence Jouego, Neu-Ulm University of Applied Sciences

Projects in the energy sector in Africa especially in rural areas suffer from a number of barriers of regulatory, institutional and financial nature. Especially the combination of political instability and an unclear regulatory environment hampers the private sector to realise the investment possibilities in the field of decentralised rural electrification. When it comes to the conditions of debt for these projects, these barriers result in prohibitive high interest rates. If local commercial banks are willing to provide debt, these lenders usually require roughly 15% for senior debt if all guarantees and insurances are made available. As the return on investment of projects in the rural energy sector typically does not exceed the low 10% area, this situation leads to strong reluctance from other private investors to proceed, especially to provide equity.

A possibility to encourage private investors to step in could be a separation of the different risks with the aim to allocate these risks to the different investor groups they are really looking for. A structured approach is proposed where private international investors are exposed only to the general political risk and international development banks cover mainly the regulatory risk. Finally, the newly invented financial instrument convertible grant by the ElectriFI initiative by the European Commission provides an equity substitute to take over the commercial risk. With this additional financial support, decentralised electrification projects in Africa have the possibility to be implemented and the potential to be scaled up in an encouraging way.

News from the Alliance

ARE selected by OFID to assist in the implementation of mini-grids (22 Jul 2015)

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ARE is delighted that four mini-grid projects proposed by its membership will receive a grant support of US$ 1 million from the OPEC Fund for International Development (OFID). The approval by the OFID Governing Board to assist clean energy mini-grids projects in Bangladesh, India, Mali and Mozambique with a de-risking mechanism for business ventures was preceded by an ARE internal Call for Proposals.

The objective is to implement four mini-grid projects within a period of 24 months. The selected ARE member consortia will not only bring in their longstanding experience with the deployment of projects in the developing world but will also leverage the OFID grant support with their own financial resources and funding from third parties. ARE will inform about the working progress on a regular basis. Should you be interested in such cooperation activities kindly contact the ARE Secretariat.

Productive Use Of Renewable Energy and Its Economic Benefits (6 Aug 2015)

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This webinar shed light on the economic aspects of the productive use of energy in remote areas in Latin America. ARE Board member Dr. Karl Reinhard Kolmsee shared the preliminary results of Smart Hydro Power’s irrigation project powered by a hydrokinetic turbine at Rio Magdalena in Colombia with savings – compared to the existing diesel - of 50%. Affordable energy brought substantial changes in the agricultural value chain and economy of remote, non-interconnected regions.

Energy poverty presents a moral and ethical dilemma. Eradicating energy poverty for 2.6 billion people is crucial to realising inclusive and sustainable development and central to promoting economic growth and improving human wellbeing. Achieving universal access to modern energy by 2030 is a declared global goal but urgent action on the ground is imperative. Is the world community on the right track towards that goal? How can promises become concrete action? What is the business case for fighting energy poverty? How much needs to be invested? What are the roles of the different stakeholders?

Together with ARE member Edu Willemse from SNV, ARE Executive Director Marcus Wiemann participated in a panel to emphasise the need for further de-risking to enable the private sector to make use of existing business and project opportunities. [SNV presentation; ARE presentation]

Innovation: 9th Energy Storage World Forum (Sydney, 14-18 Sep 2015)

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The 9th Programme features over 40 new topics including generation, transmission, retail, distribution as well as off-grid. It will also cover grid defection business models and 95% of the speakers are end-users including 6 EPCs and Project Developers, 17 Utilities / TSOs / DSOs such as: AGL, ORIGIN, ERGON and E.ON.

Dufresne started researching this Forum in 2009. Their conference format is unique and will include a session called BUILDING THE ACTION PLAN. This session will allow you to bring back to your office a tailored list of solutions useful for your strategy meetings.

This industry-open, technology-neutral event is an opportunity for energy professionals who are refining the business model and maximising the performance of hybrid renewable energy systems in remote, island, off-grid, and grid-connected environments.

ARE President Ernesto Macias will share ARE’s perspectives on the global market for microgrids. ARE members will also be showcasing their case studies in the developing world. Join them as they examine the latest business models for microgrid success, key markets, and growth opportunities for your organisation.

What is the status of the renewable energy industry in the Middle East and Africa? What are its prospects? What are the key steps that lawmakers and the industry should push for?

Policy & Business Development Officer David Lecoque will be presenting case studies from Sub-Saharan Africa, showcasing renewable energy mini-grid and off-grid solutions for industrial groups, large consumers, and public authorities.

The workshop will focus on access to electricity via off-grid solutions and access to clean cooking facilities. These twin issues represent a small share of the investments needed, yet they represent the largest share of population to be reached and served.

Financing models should support economic sustainability by including clear provisions regarding the ownership of the investment, the responsibility of providing the services and the way these are to be paid by the final consumers. Financial instruments are changing, sometimes in a revolutionary way, both on the side of savers and on the side of borrowers.

Social impact finance could represent a key element towards world access to modern energy. ARE will provide insights on ways new decentralised renewable energy solutions can be financed.

At the workshop, visitors can participate in a large number of workshop-sessions, expert lectures, sizing workouts and networking-activities. Apart from the proven best practice lectures and the running discussion, Phaesun has also integrated new sessions in the programme including a business speed dating session and an assembling station, where anyone may set their hands to a task. Special guest Christian Felber, economist and author from Austria, will also hold a lecture about creating an economy for the common good.

As part of Tech-Day, product manufacturers will offer technical product training courses in small groups the day before, on 24 Sep. Participation is free of charge for workshop visitors, however, the number of seats are limited.At the workshop, visitors can participate in a large number of workshop-sessions, expert lectures, sizing workouts and networking-activities. Apart from the proven best practice lectures and the running discussion, Phaesun has also integrated new sessions in the programme including a business speed dating session and an assembling station, where anyone may set their hands to a task. Special guest Christian Felber, economist and author from Austria, will also hold a lecture about creating an economy for the common good.

As part of Tech-Day, product manufacturers will offer technical product training courses in small groups the day before, on 24 Sep. Participation is free of charge for workshop visitors, however, the number of seats are limited.

Hosted by the South African Department of Energy together with the South African National Energy Development Institute (SANEDI), under the theme RE-energising Africa, SAIREC will demonstrate why Africa is the business destination for the renewables energy sector given its current growth trajectory and need for investment in clean energy to underpin sustainable economic growth.

The workshop presents the work of one or two IEC Technical Committees or IEC Conformity Assessment Systems around a specific theme (safety of electrical appliances, conformity assessment, rural electrification…) and also gives developing and industrialising countries a possibility to present some case studies. It is an opportunity for IEC Affiliates to meet IEC Members and to get more familiar with IEC technical work. It is also the occasion for IEC experts to become more aware of the problems faced by industrialising countries and to understand their difficulties in participating in IEC International Standardisation activities.

ARE will be part of the programme to present on actual trends in rural electrification markets.

Invitation: Energy Trilemma Summit (Addis Ababa, 29 Oct 2015)

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The Energy Trilemma Summit has been developed by the World Energy Council to provide an exclusive opportunity for the Council’s Community, together with special guests, to focus on ways to overcome the energy trilemma and to secure prosperity. Topics will explore issues that are high on the global and regional energy agenda, covering climate change mitigation, price volatility and the impact on renewables development, the energy-water-food nexus and energy access.

ARE member Solarkiosk represented by Andreas Spiess will moderate a session exploring the leveraging of partnerships to increase energy equity in Africa.

Recent Decentralised Renewable Energy Technologies Publications

Risk Management For Mini-Grids

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By ARE, HNU, id-eee and GIZ

A significant challenge for mini-grid deployment is a communication and language gap between mini-grid developers and investors about mini-grid risks and their management.

This study was initiated to improve the business environment for mini-grid development with a focus on greenfield projects through the provision of a guidance framework for decision-makers and development partners on issues related to the risks of mini-grids and strengthen public-private dialogue on the promotion of private sector mini-grid development.

Mapping Of Clean Energy Mini-Grid Support Providers And Programmes

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By SE4All

The clean energy mini-grid sector is crucial in providing clean energy access and alleviating poverty in developing countries, but is hampered by a number of barriers such as early stage market fragmentation and unmade linkages. To address this issue, the Clean Energy Mini-Grids HIO set out to map public, philanthropic and commercial sources of funding, technical and other support available for the implementation of clean energy mini-grids.

To do so, ARE on behalf of the HIO collected information on the relevant activities of a broad group of stakeholders from the whole clean energy mini-grids value chain. The results of this project, made possible by the kind financial support of the Rockefeller Foundation and GIZ as well as by the input from a wide range of stakeholders in the mini-grid markets are reflected in a webtool, where users can filter on aspects relevant to their needs, and a publication, for the benefit of all stakeholders.

The Power Africa Toolbox

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By USAID

Using a “toolkit” approach – Power Africa offers the combined technical resources of 12 U.S. government agencies, the World Bank Group, the African Development Bank, the Government of Sweden, our partner African governments, and many other Power Africa public and private sector partners.

Power Africa also provides technical assistance and transactional support through the regional and country focused Power Africa Transactions and Reforms Program (PATRP). Through this program, Transaction Advisors located in regions and countries across sub-Saharan Africa, assist in removing obstacles and moving power sector energy investments that demonstrate commercial, financial, technical, and social viability to financial close by facilitating access to the full range of Power Africa’s tools.